Sunjin Beauty ScienceLtd (KOSDAQ:086710) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Sunjin Beauty Science Co.Ltd (KOSDAQ:086710) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Sunjin Beauty ScienceLtd

How Much Debt Does Sunjin Beauty ScienceLtd Carry?

The image below, which you can click on for greater detail, shows that Sunjin Beauty ScienceLtd had debt of ₩38.6b at the end of June 2024, a reduction from ₩42.1b over a year. On the flip side, it has ₩12.2b in cash leading to net debt of about ₩26.4b.

How Strong Is Sunjin Beauty ScienceLtd's Balance Sheet?

According to the last reported balance sheet, Sunjin Beauty ScienceLtd had liabilities of ₩30.2b due within 12 months, and liabilities of ₩25.5b due beyond 12 months. Offsetting these obligations, it had cash of ₩12.2b as well as receivables valued at ₩16.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩27.4b.

This deficit isn't so bad because Sunjin Beauty ScienceLtd is worth ₩133.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a debt to EBITDA ratio of 1.6, Sunjin Beauty ScienceLtd uses debt artfully but responsibly. And the fact that its trailing twelve months of EBIT was 7.3 times its interest expenses harmonizes with that theme. On top of that, Sunjin Beauty ScienceLtd grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sunjin Beauty ScienceLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Sunjin Beauty ScienceLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Sunjin Beauty ScienceLtd is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. Looking at all this data makes us feel a little cautious about Sunjin Beauty ScienceLtd's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Sunjin Beauty ScienceLtd that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.